Share Buybacks Fuel Stock Market, Increase Debt and Lower Capital Expenditures and Growth by the Curmudgeon. For years, we've argued that the U.

The real reason to worry about obscenely high executive pay - MarketWatch

In reality, it's a game of financial engineering, which results in very subdued global economic growth as companies are not investing in their future. Conversely, it undermines future earnings by adding more debt to the corporate balance sheet. Furthermore, cutting back or eliminating longer-term research and development doesn't augur well for future growth of a company. Global Debt Skyrockets since Do I hear an Echo? This week, several columnists and fund managers started to echo the above points in what seemed to almost be a chorus!

Bolko Hohaus, manager of a technology fund for Lombard Odier in Geneva is on a crusade against share buybacks that enrich management while doing little for minority shareholders.

Hohaus is especially upset about the propensity of a group of tech companies to grant options or stock units to executives and then buy back shares to offset that issuance. That sin is compounded by opaque accounting and the extensive use of pro forma rather than generally accepted accounting principles GAAP , which often conceal the extent of dilution for institutional shareholders such as Lombard Odier.

Hohaus told the FT he laments the short-termism of executives who engage less in investment than in such financial engineering. In case you need a refresh on that item, please read Reflections on Our Short Term, Gambling Culture ]. Share buybacks are by far the most important driver of market direction. According to other fund managers, some of the newer "dotcoms" are even more egregious in their accounting practices and the dramatic rise in stock compensation they offer.

Moreover, pro forma earnings per share are often far higher than results under GAAP accounting rules.

Here's what Zero Hedge had to say this week about the troublesome topic of buybacks: In essence, companies tap yield-starved investors in the debt market and use the proceeds to repurchase shares, thus ensuring a constant bid for their stock while artificially inflating earnings and propping up the value of equity-linked compensation at the same time. All of this comes at the expense of capex i. From JP Morgan via ZeroHedge: Lack of confidence in organic growth alternatives, very low cost of debt relative to equity, a struggle to improve ROEs, and relatively flat WACC Weighted Average Cost of Capital curves have driven the pace of share buybacks.

Meanwhile, corporations have amassed massive cash stockpiles and debt in the years since the financial crisis, which they don't invest in their actual business or significantly hire more workers. Instead, the money is used for "shareholder friendly" activities like buybacks and dividends which Blackrock's Fink says is very short sighted.

Stock Buybacks Propel Executive Bonuses | Scott Thurm, Serena Ng | Muck Rack

Debt has also increased sharply. Despite the economic rebound since , McKinsey found that the debt of households, corporations and especially governments continues to rise strongly.

Is anyone paying attention to that risk? How big is big?

CNBC reports that in April, U. Again, from ZeroHedge this week emphasis added: The total capital returned to shareholders was only slightly less than the annual earnings reported. The gargantuan buyback binge has gotten so huge that it actually exceeded profits in two quarters in Money returned to stock owners exceeded profits in the first quarter of and may again in the third. Apple's 4th stock buyback in last year.

Here's a glaring example of the stock buyback mega-mania: In the first week in May, Apple the largest cap stock in the U. Stock Market, but for how long?

Buybacks have helped fuel one of the strongest rallies of the past 50 years as stocks with the most repurchases gained more than percent since March Data from Birinyi Associates indicate that the single biggest factor for keeping the equity bull market going is the purchase by companies of their own shares. Individual and institutional investors have sold more stock than they've bought this year i. It's important to note that the last stock repurchase record was just before the market topped in prior to the financial crisis the following year.

Here's a " deja vu" reminder for you to ponder from July 18, Boom in Buybacks Helps Lift Stocks to Record Heights. Institutional investors, like those quoted above, say executives should start plowing money into their businesses, rather than buyback shares or hoard cash. Investment strategists have warned this easy money fueled buyback bubble could end very badly if the Federal Reserve raises rates too fast not likely.

Victor has repeatedly stated that the bubble will likely pop when there's some financial accident or a negative event occurs which the Fed can't control.

We end with a quote from the earlier referenced ZeroHedge post, which identically matches our belief: So when the cycle finally turns and everyone who gorged themselves on corporate debt in a desperate attempt to find yield suddenly discovers just how illiquid the secondary market has become prompting fire sales and when the margin calls start for everyone who has borrowed in a frantic attempt to serve as the greater fool for the last guy who bought on margin, don't say we didn't warn you.

The Curmudgeon ajwdct sbumail.

As Companies Step Up Buybacks, Executives Benefit, Too - WSJ

Follow the Curmudgeon on Twitter ajwdct Curmudgeon is a retired investment professional. He has been involved in financial markets since yes, he cut his teeth on the bear market , became an SEC Registered Investment Advisor in , and received the Chartered Financial Analyst designation from AIMR now CFA Institute in He managed hedged equity and alternative non-correlated investment accounts for clients from Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned since to profit in the ever changing and arcane world of markets, economies and government policies.

Victor started his Wall Street career in and began trading for a living in As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

Apple's 4th stock buyback in last year Here's a glaring example of the stock buyback mega-mania: Boom in Buybacks Helps Lift Stocks to Record Heights Institutional investors, like those quoted above, say executives should start plowing money into their businesses, rather than buyback shares or hoard cash.